How Is Earnings News Transmitted to Stock Prices?

Abstract

We study price formation around earnings announcements for S&P 1500 stocks from 2011 to 2015 using high-frequency, order-level data. Price discovery is generally complete in the after-hours market, or by 10 a.m. for stocks with no after-hours trades. Initial price reactions following announcements are explained by earnings surprises, not by liquidity-taking order flow, consistent with the theoretical view that news can incorporate prices instantly. Moreover, sophisticated liquidity providers are active and profitable at that time. Despite fast price discovery, we find significant price drifts following big surprises in the after-hours market, which we relate to theoretical work on information processing.